Brazil economy: Quick View - Economic activity better than expected

Economic activity increased more strongly than expected in February, according to the economic activity index (IBC-Br) released by the Banco Central do Brasil (the central bank) on April 17th.

Analysis

Before publication of the IBC-Br, which is a proxy for GDP, market consensus was for a gain of about half a percentage point in February relative to January. But the index exceeded expectations, growing by 1.3% in seasonally adjusted month-on-month terms, which is the strongest single monthly improvement registered since 2010. The central bank also made a significant upward revision to January's IBC-Br result, which now shows growth of 0.6% month on month, up from a negative 0.3% previously. As a result, the first two months of the year are now showing a more positive trend in economic activity. In the three months to February the index rose by 0.8% quarter on quarter. To put this in context, Brazil is only just beginning to emerge from a recession that has lasted 11 quarters—almost three years. On a 12-month basis the IBC-Br is still down by 3.7%, but the finance minister, Henrique Meirelles, has nevertheless welcomed the IBC-Br numbers as an indication that Brazil will achieve a meaningful rate of growth by the end of 2017.

Various factors appear to lie behind the improvement in the IBC-Br in the first two months of this year. Business sentiment may have been strengthened by the government's initial success late last year in controlling fiscal expenditure, although major challenges, such as pension reform, still lie ahead. Inflation has fallen, allowing the central bank to cut interest rates aggressively (in the latest reduction on April 12th the Selic reference rate was cut by 100 basis points, to 11.25%). In addition, larger harvests are lifting activity in the agricultural sector, manufacturing has benefited from an increase in car exports, and the services sector grew by 0.7% month on month in February. In contrast, retail was down by 0.1%. Unemployment remains high and could continue to dampen private consumption levels across the economy.